The Purpose of IFRS

 

Purpose of IFRS

International Financial Reporting Standards (IFRS) are global rules of finance to prepare and present statements. These standards ensure
consistency in accounting procedures, which facilitates the understanding and comparison of financial accounts across national boundaries.   


IFRS was designed by the International Accounting Standards Board in 2003 and is accepted by over 168 countries worldwide.
IFRS has become the worldwide standard for accounting over time. 
In this article, we will learn more about the impact, and benefits of IFRS.

The Purpose of International Accounting Standards

Well, today is the age of the Global economy where capital flow and cross-border transactions are very important. Presently, one in three transactions are international and that proportion is only going to increase. Companies regularly raise capital, do business abroad, or have investments across the world and investors are looking to invest globally more than ever. However, it was also harder to manage these cross-border transactions as each country had its accounting standards. This made companies prepare invoices and financial statements according to the legal rules of different countries which was indeed a very complex process. Investors faced similar problems and the fact that financial statements under different standards were incomparable made it hard for investors to make informed decisions. IFRS came into force to resolve these ambiguous situations and to ensure uniformity of parameters that everyone throughout the world should follow.

Who Uses IFRS?

IFRS is used by 168 countries and jurisdictions, though the specific requirements can vary. Some countries might only require large companies to follow IFRS, while others might extend the requirement to banks and financial institutions.

Impact of IFRS Adoption

International Financial Reporting Standards (IFRS) not only greatly influence the preparation and publication of financial statements but also have impacts on reporting aspects within economic literature about investment decisions as indicated by Barbu & Georgescu M.

Transparency:
 IFRS calls for companies to disclose financial data openly and succinctly. This transparency helps individuals, whatever role they may play in the financial markets exercise due diligence, and trust is maintained allowing all interested entities (businesses or stakeholders/investors) to make adequately informed decisions.

Comparable:
Financial statements will be more comparable across different countries and companies under IFRS. Different accounting standards created additional points of confusion regarding company performance before IFRS. But with a standardized set, companies would be all governed under the same principles which meant easier apples-to-apple comparisons.

Quality: IFRS has improved the quality of financial data companies disclose. The standards focus on the substance of transactions rather than just following rules, leading to financial statements that more accurately reflect a company’s economic activities. This enhances the relevance and reliability of financial data, which is essential for decision-making.


Global Use of IFRS

IFRS serves several key purposes around the world:

Financial tool:
it helps to form the basis of efficiency, accuracy, and transparency of the abundant quantity and high-quality information for long-term growth, sustainability & credibility in the global economy.

Guidelines & Principles:
Companies must prepare and report their financial statements according to IFRS guidelines. Failure to comply can result in penalties, ensuring trust in the company’s financial reporting.

Decision Making:
Investors find it easier to make decisions when companies follow a universal method of creating financial statements. This consistency makes financial reports easier to understand and compare.

Economic Enhancement:
Companies that follow IFRS are more likely to attract investment because their reports are considered credible and trustworthy. This credibility can lead to economic progress and increased international investment.

Why Countries Adopt IFRS

Countries adopt IFRS to achieve consistency in accounting practices, languages, and standards. This consistency helps investors and businesses make informed financial decisions. Additionally, IFRS fosters trust and transparency, which are crucial for a healthy global economy.

Benefits of IFRS for Companies

The benefits of adopting IFRS go beyond simply following standardized principles:

  • Reduced Cost of Capital: Companies that adopt IFRS are often seen as more trustworthy and transparent, leading to higher valuations and lower borrowing costs.
  • Improved Access to Capital: Many investors require companies to follow global accounting standards, so those that adopt IFRS have better access to significant investment opportunities.
  • Enhanced Risk Management: IFRS requires companies to disclose more detailed information about their financial instruments and risks, helping them manage risks better and achieve more stable financial performance.

Financial executives and chartered accountants can enhance their careers by obtaining IFRS certification, which can help their companies succeed on the international stage.

 

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